The IRS Takes a Closer Look at Colleges

The government is probing tax breaks at more than 30 universities

Michael McDonald

November 17, 2011, 6:28 PM EST

Harvard University owns a hotel that overlooks the Charles River and charges up to $300 a night for a room. The country’s richest higher-ed institution doesn’t pay a cent in taxes on revenue from the high-rise in Boston, Mass., and hasn’t for at least five years. Now, the Federal government wants to know: Are taxpayers getting shorted?

Not-for-profit universities are exempt from paying taxes on tuition or other money that relates directly to their educational mission. But the government has long required them to pay up on a class of revenue known as “unrelated business income.” That’s a broad category, encompassing college-owned bookstores, restaurants, sports arenas, and other venues that sell goods and services to the public. Although the regulation has been in place since 1950, the IRS has stepped up enforcement only recently. According to public tax filings and IRS correspondence obtained by Bloomberg News, more than 30 universities are coming under increased scrutiny. The IRS declined to disclose a complete list of the schools under review, but Notre Dame, Purdue, the University of Texas at Austin, Texas A&M, the University of North Carolina, the University of Georgia, Lamar University, the University of Central Florida, Yeshiva University, Suffolk University, and Harvard confirmed the IRS is eyeing them. The government is looking into whether schools improperly claimed tax-exempt status for taxable businesses.

John Walda, president and CEO of the National Association of College and University Business Officers, a trade group in Washington, says the schools have nothing to hide. “Our members are in compliance and doing their best to abide by the spirit and the letter of IRS regulations,” says Walda.

Others suggest some colleges may have gotten creative with their accounting, leaving plenty for the IRS to inspect. “The joke is they are the world’s worst businessmen because they are always ‘losing’ money,” says Paul Streckfus, a former IRS auditor who publishes EO Tax Journal, an electronic newsletter. “They are making money,” Streckfus contends, “or they wouldn’t be doing this.”

The inquiry began in October 2008, when the IRS sent a 33-page questionnaire to 400 schools asking for details about their noneducational business ventures. After checking the schools’ responses against their tax filings from previous years, IRS officials announced in a preliminary report last year that most of the colleges appeared to be collecting revenue that they considered exempt but which the agency said could be subject to taxes. The auditors are specifically investigating whether any of the schools improperly reported losses on the outside businesses, allowing them to avoid paying taxes.

Harvard reported to the IRS that its noneducational enterprises, including the hotel on the Charles River, lost $1.4 million from 2009 to 2010, according to the university’s tax filings. Because of the losses, Harvard paid no taxes on its outside businesses. That has been the case for at least five years, the school’s annual tax records show. Harvard spokesman John Longbrake declined to comment.

Another school under review, the University of Georgia, also runs a number of outside business ventures, including a 200-room hotel, a health-center, an eight-acre athletic complex with three pools, and an 18-hole golf course. In 2006 the school reported to the IRS that it operated just two for-profit business ventures. After the IRS started asking questions, Georgia bumped that number up to 15, according to the university’s tax records. Wendy Jones, a spokeswoman for the university, declined to comment.

Lois Lerner, the IRS’s director of tax-exempt organizations who is overseeing the investigation, says many schools are rethinking how and what they report to the government. Receiving a thick questionnaire from the IRS, she says, is a “behavior changer.”

BOTTOM LINE -

The bottom line: The IRS is examining whether more than 30 colleges underreported taxable income earned at hotels and sports complexes.